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Project Appraisal-

Cost-Benefit Analysis of

Transport ProjectsBy

Ishtiaque AhmedPhD- University of Kansas, USA in 2003

ME- AIT, Bangkok in 1997

BE- NIT, Surat, India in 1992

Work Experiences- Bangkok, Samutprakan-Thailand, Kansas, California and Florida-USA, Punjab-India, Sri Lanka

Currently- Transport Specialist, The World Bank

Dhaka Office, since March 2006.

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Transport and Development

• The basic economic problem is that society has unlimited wants and needs, but only a finite amount of resources available to meet them.

• Consequently, it is vitally important that resources are used in the most productive and beneficial way.

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Transport and Development

• Two general forms of project appraisal:

Financial appraisal, which simply evaluates a project according to the net financial gain that it brings In the comparison of two projects, the one which brings the greatest profit to the investor will be the one selected.

Economic appraisal, or cost-benefit analysis, which includes all costs and benefits to society: not just financial. In this case, the project which is the most beneficial to society as a whole will be the one selected.

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The Methodology of

Cost-benefit Analysis

• Cost-Benefit analysis can be viewed as comprising of seven steps:

Specify the Alternatives

Identify the Impacts

Predict the Total Impacts Over the Lifetime of the Project

Monetize the Impacts

Discount the Impacts to Obtain the Present Values

Compare the Net Present Value of Each Alternative

Conduct Sensitivity Analysis

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The Methodology of

Cost-benefit Analysis (1)

Specify the Alternatives

The first step in the process is to identify all of the potential alternatives.

Different alternatives before: Construction of a Highway Bridge can be:

1. Business As Usual

2. Improve the BIWTC Ferry System

3. Construct a Bridge With or W/O Rail Link

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The Methodology of

Cost-benefit Analysis (2-i)

Identify the Impacts

To list all of the potential costs and benefits surrounding the project.

The costs for each option would include the initial capital cost of construction, the ongoing maintenance costs, the Social and Environmental Costs.

The benefits are likely to include journey-time savings, increased trade between the two towns and regions and reduced congestion.

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The Methodology of

Cost-benefit Analysis (2-ii)

Example- Benefits from a new Rail based ICD at Dhirasram

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The Methodology of

Cost-benefit Analysis (3)

Predict the Total Impacts Over the Lifetime of the Project

Projects do not only create immediate costs and benefits. Infrastructure projects, have life spans stretching for many years and costs and benefits will be generated throughout them.

This involves effective forecasting.

The relationship between variables is extremely complicated and so accurate forecasting of the impacts over the time is fraught with difficulties.

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The Methodology of

Cost-benefit Analysis (4)

Monetize the Impacts

Steps 2 and 3 generate a list of all of the impacts but they are all in different units. Journey-time savings will be in hours, whereas the effects of reduced number of accidents will be in a different term. This means that it is impossible to compare the impacts and so all of them need to be

measured in a single unit: money.

This can be difficult, and controversial, to do. In cost-benefit analysis it is usually done through a willingness-to-pay approach, in which the value is simply the amount that people are willing to pay to avoid a cost or to generate a benefit.

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The Methodology of

Cost-benefit Analysis (4-Ex-i) But How to Monetize the Impacts?

Let’s Take an Example of Value of Travel Time.

No Single method could possible provide the exact value of travel time savings resulting from a transport project.

Many different travelers use any given facility, each with their own unique valuation of time (due to their economic productivity or personal views toward time use).

The most commonly used estimate of the value of travel time is the prevailing wage rate in the area surrounding the system.

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The Methodology of

Cost-benefit Analysis (4-Ex-iii)

The Highway Economic Requirements System (HERS) developed by NCHRP Report 456 (TRB)

Computer Model designed to Estimate the Benefits using using life-cycle benefit-cost analysis.

Since 1998, the UK Department for Transport

has been using a computer-based cost-benefit

analysis model. The cost-benefit analysis part

of the appraisal is known as the COBA model.

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The Methodology of

Cost-benefit Analysis (4-Ex-iv)

Shortcut Method based on HERS for On-the clock Trips and Off-the-clock trips (Page 20 of the NCHRP report)

By direct observation, measure the current travel time and AADT. Then using a travel demand model or based on assumptions- Estimate the Change in Travel Time and AADT.

Using Cordon-line Survey or through by Observations, Estimate the Vehicle-Occupancy Rate and the Vehicle Mix.

Estimate the number of vehicle hours saved on an annual basis, using the values derived in Step-1. Using the Occupancy Rates in Step-2, calculate the Total number of Person-Hours that would be saved annually.

Apply the HERS fraction of Person-Hours saved calculated in Step-3, that are related to automobile trips On-the clock (10 percent of all vehicle hours and, hence, person hours), and apply the current Average Wage Rate plus Fringe Benefits for the area. For person hours pertaining to Other Automobile Trips, use 60% of this wage rate. The result is for the annual value of time savings for automobiles.

Similarly, for other other modes like Trucks- Wage Rates are collected from trucking industry.

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The Methodology of

Cost-benefit Analysis (4-v)

Discuss the RHD Road User Cost Annual Report For 2004-2005

• “in vehicle time” and “out of vehicle time”.

• Based on “Average Wage Approach”

• “Work Time” and “Non-Work Time”

• The TTC for WT is taken as the estimated wage rate

• The value of NWT as a proportion of the wage rate- 35% (TRL).

• Recommended Financial and Economic TTC (Page 33)

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The Methodology of

Cost-benefit Analysis (5)

Discount the impacts to obtain present values

• For projects with costs and benefits that stretch over many years,

it is important that the values be discounted/ adjusted so that

they reflect the true value of the costs and benefits today.

• A sum of money today is worth more than the promise today of

the same sum of money in ten years' time. Inflation is a part of

this, but the major factor is that of peoples' preferences.

• This is done simply adding up the value today of all the future

costs and benefits, each discounted by its appropriate factor. The

difficulty here is in establishing the value for the social discount

rate.

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The Methodology of

Cost-benefit Analysis (6) Compare the Net Present Value of Each

Alternative

• The net present value (NPV) is simply the present value of the

benefits minus the present value of the costs.

• For a project that is being assessed in isolation, the authority

should proceed if the net present value is positive.

• If there is more than one alternative being assessed, such as

Construct a Bridge or Improve the Ferry System, then the project

with the greatest net present value should be selected as that

would lead to the greatest overall welfare improvement given the

costs incurred.

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Net Economic Benefits

Stream of Economic Costs (M US$)

Without Project With Project

Road Road Total Road Road Total Net Discount Rate Sensitivity

Year Agency User Society Agency User Society Benefits Discount Net Present

2006 0.01 0.47 0.48 1.60 0.49 2.09 -1.61 Rate Value, NPV

2007 0.01 0.50 0.51 0.02 0.29 0.31 0.20 (%) (%)

2008 0.01 0.53 0.54 0.02 0.30 0.32 0.22 5.0% 2.03

2009 0.01 0.55 0.56 0.02 0.31 0.33 0.23 6.0% 1.71

2010 0.01 0.57 0.58 0.02 0.32 0.34 0.24 7.0% 1.42

2011 0.10 0.59 0.69 0.02 0.33 0.35 0.34 8.0% 1.17

2012 0.01 0.56 0.57 0.02 0.34 0.36 0.20 9.0% 0.95

2013 0.01 0.63 0.64 0.02 0.35 0.37 0.27 10.0% 0.75 Net

2014 0.01 0.66 0.67 0.02 0.36 0.39 0.28 11.0% 0.58 Present

2015 0.01 0.68 0.69 0.02 0.38 0.40 0.29 12.0% 0.43 Value

2016 0.01 0.70 0.71 0.02 0.39 0.41 0.30 13.0% 0.29 at 12%

2017 0.10 0.73 0.82 0.02 0.40 0.43 0.40 14.0% 0.16

2018 0.01 0.68 0.69 0.02 0.42 0.44 0.25 15.0% 0.05

2019 0.01 0.77 0.78 0.02 0.43 0.46 0.33 15.5% 0.00

2020 0.01 0.80 0.81 0.25 0.45 0.70 0.12 16.0% -0.05

2021 0.10 0.83 0.93 0.02 0.47 0.49 0.44 17.0% -0.14

2022 0.01 0.78 0.80 0.02 0.48 0.51 0.29 18.0% -0.22

2023 0.01 0.88 0.90 0.02 0.50 0.52 0.37 19.0% -0.29

2024 0.01 0.92 0.93 0.02 0.52 0.54 0.39 20.0% -0.36 Internal

2025 0.01 0.95 0.96 -0.62 0.54 -0.08 1.04 Rate of

Present Value at 12% Discount5.28 4.85 0.43 Return

Net Present Value at 12% (M US$) 0.43

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The Methodology of

Cost-benefit Analysis (7)

Conduct Sensitivity Analysis

• There are elements of uncertainty which can hugely affect the

results of the analysis.

• It is important that the analyst weighs each element in the

analysis according to how certain it is: those elements that are

certain should be given a stronger weighting than those which are

less so.

• This helps the final decision to more accurately reflect the true

values of the impacts.

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The Methodology of

Cost-benefit Analysis (7)

Conduct Sensitivity Analysis for A Deep Sea Port

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Cost-benefit Analysis

Limitations of Cost-Benefit Analysis

There are two general criticisms of cost-benefit analysis.

• Criticism of the utilitarian and Hicks-Kaldor assertion that if total

social welfare is increased that is desirable even if it involves a

reduction in the welfare of an individual or a group of individuals.

• Criticism regarding the practicalities of the analysis:

The ease with which important costs and benefits can be omitted from the

analysis, thereby biasing the results.

The difficulty of placing a monetary value on the costs and benefits that have

been identified.

The difficulty of conducting effective sensitivity analysis.

There are elements of uncertainty which can hugely affect the results of the

analysis.

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HDM-4 Objectives (1)

Alignments

Pavement

standards

Road standards

Economic basis for selecting investment alternatives

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HDM-4 Objectives (2)

Traffic congestion

Vehicle emissions

Travel times

Non-motorized

transport facilities

Transport costs

Road accidents

Minimize Road Agency and Road User Costs

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HDM-4 Concept

• Predicts road network performance as a

function of

Traffic volumes and loading

Road pavement type and strength

Maintenance standards

Environment / Climate

• Quantifies benefits to road users from:

Savings in vehicle operating costs (VOC)

Reduced road user travel times

Decrease in number of accidents

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Discount Annual

Costs & Compare

Predict Road

Deterioration

Predict Road

Work Effects

VOC, Accident

& Time costs

Output

NPV, IRR,..

Input

Data

Repeatfor all years

HDM-4 Life Cycle Analysis

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Comparison of Project Alternatives

Cost of

Paving

WithoutPaving

Discounted RAC

Project Life (years)End of

Analysis

NPV

RUC

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• 1969-1995 – HCM, HDM-II, HDM-III- Collaborative international studiesWorld Bank & MIT, LCPC, TRRL, UNDP

- Governments of Kenya, Brazil, Caribbean, India- $20 million data collection in 4 field studies

• 1995-2005 – HDM-4 version 1.0 to 1.3- International sponsors, PIARC- Redesign of functions and software- Focus on road agency usage

• 2006-> HDM-4 version 2.0- HDMGlobal International Consortiumresponsible for management as sales

International Collaboration

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1969-1971 Phase 1 - Conceptual Framework- MIT, TRRL- First Prototype - LCPC- The World Bank

1971-1975 Kenya Study - VOC Study- TRRL- Road Deterioration Study - Kenya- The World Bank

1977-1982 Caribbean Study- VOC Study- TRRL- Caribbean Countries

1977-1983 India Study - VOC Study- CRRI - New Delhi

1975-1982 Brazil Study - VOC Study- GEIPOT - Brazil

- Road Deterioration Study - United Nations - The World Bank- Texas Research

1981-1987 Final Phase - Modeling - The World Bank

1987 HDM-III Publications - Research Documentation - The World Bank

1989 HDM-III Software - PC Computer software - The World Bank

1995 HDM System - Congestion, HDM Manager - The World Bank

HDM-III Development

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Other

Contributors

SNRASweRoad

VTI

Technical

Advisors

ODAThe University

of Birmingham

ADBN D Lea Int.

IKRAM

FICEMICH (Chile)

Catholic Univ.

Overseas Development Administration (ODA/DFID)

Asian Development Bank (ADB)

Swedish National Road Administration (SNRA)

Inter-American Federation on Cement Producers (FICEM)

The World Bank (IBRD)

The World Road Association (PIARC)

Steering Committee(World Bank)

SecretariatThe University

of Birmingham

HDM-4 Sponsors

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HDM-4 Version 2.0 Coordination

• In 2005 PIARC awarded a five year concession to HDMGlobal for the future management of HDM-4 with exclusive rights for its distribution.

• HDM4Global is an international consortium of academic and consultancy companies that have formed a partnership.

• At the center of consortium is the Highway Management Research Group a UK based association of the University of Birmingham, Atkins and Scott Wilson in partnership with; TRL Ltd also of the UK, ARRB Transport Research Ltd from Australia, ENPC and Scetauroute from France, and ICH of Chile.

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Total Society Costs

o Construction

o Maintenance

o Vehicle operation

o Passenger and cargo time

o Accidents

ROAD AGENCY COSTS

ROAD USER COSTS

=

+

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CONSTRUCTION- Pavement- Structures- Furniture- Formation- Land

MAINTENANCE- Routine- Pavement- Structures

SYSTEM OPERATION- Traffic mgt.- Safety- Management

EXTERNAL- Accidents- Pollution- Access- Production

ROAD USERS- Fuel, lubricants- Maintenance- Depreciation- Time- Accidents

Total Society Costs Composition

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Minimizing Total Society Costs

Optimum

Total

Road User

Road Works

Cost

Design Standards

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Road User Effects

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RoadGeometry,Condition

Driver,TrafficFlow

VehicleCharacteristics

Fuel & Lubricants

Tire

Maintenance Parts & Labor

Crew Time

Depreciation & Interest

Passenger & cargo time

SPEED

CO

MP

SU

MP

TIO

N

Road User Costs Model

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Let’s Run the HDM-4 now!

Feasibility Study for

Widening of Tongi-Joydevpur Highway

Any Questions?